China's output data adds to case for economy steadying

An employee wipes equipment on the production line of hawthorn red wine at a factory in Weifang, Shandong province July 28, 2013.
REUTERS/China Daily/Files

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A general view of Shanghai's financial district of Pudong is seen from the top of the Shanghai Tower, which is undergoing construction, August 3, 2013.
REUTERS/Carlos Barria

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By Koh Gui Qing and Langi Chiang| BEIJING

BEIJING China's factory output grew in July at its fastest pace since the start of the year, adding to a run of data suggesting the world's second-largest economy may be stabilising after more than two years of slumping growth.

A steadying economy would be a relief to China's leaders, who worry a further slowdown could derail their efforts to rebalance the economy away from its credit- and investment-driven growth model to one in favour of consumption.

Factory output rose 9.7 percent in July from a year earlier, the fastest growth since output grew 9.9 percent over January and February, National Bureau of Statistics data showed.

It followed Thursday's surprisingly strong trade data and, given targeted measures since mid-year to support small firms and exporters, added to signals the economy may have found its base after slowing in nine of the past 10 quarters.

"While we would not say that China is out of the woods yet, the recent rise in sentiment has been noticeable, and talks that economic growth will fall below 7 percent in 2013 now seems rather far fetched," said Chester Liaw, an economist at Forecast Pte in Singapore.

The government has made clear it will accept some slowdown as it pushes through its reforms, but has also expressed confidence of meeting its 7.5 percent growth target this year - which would be China's slowest growth in 23 years.

China's CSI300 index reversed early losses after the data to end up 0.4 percent and post its biggest weekly gain in a month.

And the Australian dollar, which is seen as a proxy for China because of their extensive trade, was up 0.4 percent on the day to its highest since July 30.

Separate data showed consumer inflation ran at a benign annual rate of 2.7 percent in July, close to forecasts. A 2.3 percent fall in producer prices, a 17th straight month of deflation, also suggested the outlook for prices was tame.

Premier Li Keqiang has stressed policy would not change if economic growth held above an undisclosed lower limit, which many consider to be 7 percent, but analysts were hopeful that moderate price pressures would allow some loosening.

"The muted inflation reading will provide necessary room for implementing a mini-fiscal stimulus," Lu Ting, an economist at Bank of America-Merrill Lynch said.

A Reuters poll last month found China is not expected to cut interest rates before the end of 2014, although a minority of analysts think a cut is needed to meet the 7.5 percent growth target.

Loans and other money data released on Friday indicated China did not ease monetary conditions last month, in line with the central bank's hawkish stance, with particular regard to house price inflation.

Data showed banks lent 699.9 billion yuan worth of loans in July, higher than forecast but down from June. Bank lending is a centrepiece in China's monetary policy as the government tells banks how much to lend.

"The tightness in liquidity is likely to continue as the current policy takes effect, but it won't get tighter," said Zhou Hao, an economist at ANZ in Shanghai.

Thursday's trade data showed exports rose 5.1 percent in July from a year ago, a smart bounce from their first fall in 17 months in June, and imports jumped 10.9 percent as China shipped home record amounts of some commodities.

Yet analysts warned against concluding the data over the past two days was driven by an actual rise in final demand.

They said imports were partly inflated by delayed shipments and unprocessed deals from June, firms rebuilding stocks after a lull and new companies entering the business.

Similarly, some caution was needed in interpreting Friday's production data.

A breakdown of the factory data showed power output rose 8.1 percent in July from a year ago, quickening from June's growth, while the volume of crude oil processed in refineries climbed 7.1 percent, down from June's near 11 percent.

Yet power output includes power generated but lost through inefficient grids. Power consumption, on the other hand, has fallen steadily and July numbers are out later this month.

And although the volume of crude oil processed in refineries is a gauge for final demand, China does not publish consumption data for diesel, the main fuel for vehicles and for which demand has fallen as the economy has cooled.

SUSTAINABLE MOMENTUM?

Huang Guohua, a senior official in the Customs Administration, said the trade report did not herald a turnaround, with the Chinese and global economies still mired in a complicated environment.

"It's dubious to infer the rebound in (trade) signals a turning point," Huang said. He added, though, that there should be stable trade growth this year thanks to government support measures.

Perennial concerns about the reliability of China's data have seen analysts look to indicators such as box office receipts to salt consumption for clues on how activity is holding up.

And these measures echo Beijing's line: that China's economy has slowed, but not as dramatically as some fear.

The auto sector, a barometer for manufacturing since it spins off demand in goods from chemicals to metals, is displaying resilience. Vehicle sales were up 9.9 percent in July from a year ago, down from June but steady within a trend seen in the past year.

Some firms too are reporting upbeat sales. Luxury Italian fashion house Prada (1913.HK) said China helped to lift its sales by 12 percent in the six months to July.

"Broadly speaking, economic growth is stabilising and recovering slightly, but we still need to see whether the momentum can be sustained," said You Hongye, an economist at Essence Securities in Beijing. (Additional reporting by Shao Xiaoyi, Kevin Yao, David Stanway, Chua Aizhu and Judy Hua; Editing by John Mair)

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